Global investment banks (IBs) and capital markets are turning their attention to Greater China, the world’s largest manufacturing hub and the financial center of Asia. “Capital Hub” is a series covering news from China and the Greater China capital markets. From the mainland markets in Shanghai and Shenzhen to Hong Kong’s dollar liquidity hub and Taiwan’s semiconductor value chain, this series traces the flow of capital across the Greater China region and captures the current temperature and direction of these markets as Asia’s financial hub. [Editor’s Note]

[E-Daily Marketin Reporter Won Jae-yeon ] Hong Kong’s long-standing status as a gateway for wealthy mainland Chinese to manage their overseas assets is being shaken. Hong Kong had grown into Asia’s largest wealth management market by attracting assets from wealthy mainland Chinese, and last year it surpassed Switzerland to become the world’s largest offshore wealth management hub. However, as Chinese authorities have tightened restrictions on capital outflows, Hong Kong financial institutions have faced obstacles in courting wealthy mainland clients. With everything from unlicensed offshore stock trading to investment accounts and insurance products falling under the regulatory net, Hong Kong’s status as the “Switzerland of the East” is now being put to the test.

Recently, financial authorities in China and Hong Kong have been successively tightening the screws on back channels used by mainland capital for offshore investments. Eight government agencies, including the China Securities Regulatory Commission (CSRC) and the People’s Bank of China, announced a two-year intensive crackdown plan in May targeting illegal offshore securities, futures, and fund operations. The core of the plan is to crack down on activities by overseas financial firms not licensed in China that open accounts, accept orders, process trading instructions, transfer funds, or solicit investors from mainland investors. Later that same month, the CSRC announced sanctions against overseas online brokers such as Futu, Tiger Brokers, and Longbridge, stating that they had provided overseas securities trading services in the mainland without authorization.

The practice of achieving investment returns through derivative contracts rather than directly purchasing foreign stocks also came under regulatory scrutiny. In the past, mainland investors had entered into total return swap (TRS) contracts with certain securities firms to exchange gains and losses based on fluctuations in foreign stock prices. However, it was reported that the CSRC instructed brokerage firms last June to halt the provision of new overseas investment exposure. While the authorities are not forcibly liquidating existing investors’ accounts and assets, they are blocking new purchases and additional deposits while allowing only sales and withdrawals, in an effort to reduce the balance of unofficial offshore investments.

Hong Kong has long been called the “Switzerland of the East” due to its financial system, which differs from that of mainland China. Based on its Hong Kong dollar system pegged to the U.S. dollar, free capital mobility, low tax rates, and Anglo-American legal system and financial infrastructure, Hong Kong has served as an overseas financial hub for Asia’s high-net-worth individuals. For mainland Chinese, Hong Kong was a market that, while geographically close, was financially akin to an overseas market.

This is precisely why wealthy mainland Chinese have flocked to Hong Kong. While individual foreign exchange conversions and overseas investments are restricted within China, in Hong Kong, they could hold U.S. dollar assets through bank accounts, insurance policies, funds, and overseas stock trading. Since holding only yuan-denominated assets leaves one fully exposed to a real estate market downturn, a weakening yuan, and policy risks, Hong Kong bank accounts and insurance products have long been used as channels for asset diversification, funding children’s education abroad, and preparing for immigration.

Recently, Chinese authorities have begun to take issue with this practice due to pressure from capital outflows. On the mainland, the real estate slump and sluggish domestic demand have persisted since the Evergrande crisis in 2021. Compounded by the pressure on the yuan to weaken amid the U.S.-China interest rate differential and a strong dollar, concerns have grown over the outflow of funds from mainland high-net-worth individuals into overseas stocks, insurance, and Hong Kong accounts. Although the annual foreign exchange purchase limit for Chinese individuals is $50,000 (approximately 77 million won), there have been persistent concerns in the market that this limit has been circumvented, particularly through the purchase of Hong Kong insurance policies or overseas investment products.

Hong Kong’s banking sector is also aligning its actions with those of the authorities. The Hong Kong Monetary Authority (HKMA) recently required banks to strengthen their screening processes for investment accounts opened by mainland customers. Some banks, including HSBC, Hang Seng Bank, and BOC Hong Kong, have begun implementing procedures to verify that funds deposited by mainland customers into investment accounts do not originate from mainland China. On-the-ground sales activities are also shrinking. Until now, Hong Kong banks and wealth management firms have targeted high-net-worth individuals from the mainland. However, as the practice of introducing overseas financial products or encouraging account openings within the mainland has become subject to crackdowns, there is a growing trend toward scaling back such operations.

Insurance companies are particularly sensitive to this trend. For wealthy mainland Chinese, Hong Kong insurance products have been used not merely as protection but as a means to hold dollar-denominated assets and diversify funds overseas. Sales of life insurance in Hong Kong reached a record high of $42 billion (approximately 64.83 trillion won) last year, but a significant portion of this relies on demand from mainland visitors. AIA Hong Kong generated $2.3 billion (approximately 3.55 trillion won) in Value of New Business (VoNB) last year, with mainland Chinese customers accounting for 51% of that figure.

However, some interpret this as not an attempt by Chinese authorities to undermine Hong Kong’s status as a financial hub. China is maintaining regulated investment channels approved by the authorities, such as Stock Connect and the Qualified Domestic Institutional Investor (QDII) program. The Cross-Border Wealth Management Connect, which allows residents of the mainland, Hong Kong, and Macau to invest in each other’s wealth management products within set limits, falls under the same framework. It appears that while unofficial back channels are being blocked, the authorities are attempting to channel investment demand through official channels where they can monitor capital flows.

Although the nickname “Switzerland of the East” remains, the business environment for Hong Kong’s financial institutions is no longer what it used to be. While Hong Kong will continue to serve as an overseas gateway for Chinese capital, the channels through which mainland private funds once flowed relatively freely are likely to narrow. This is an unwelcome change for Hong Kong financial institutions, which have generated profits by attracting funds from wealthy Chinese individuals and channeling them into bank accounts, insurance, funds, and overseas stock trading. Rather than the Hong Kong wealth management market being immediately shaken, it is more accurate to say that the high-yield business model targeting wealthy mainland clients has reached its limits.